This post is dedicated to the longest living and unconquered King of all times – ‘Cash’.
Once you invite the King, you can’t cancel later.
In 2001, contests2win.com (my first Internet Company) had pioneered a very interesting concept called ‘Boomerang Marketing’. It involved creating a contest that sent visitors from c2w.com to the client’s website, getting them to register on that site and bringing them back (boomerang) to c2w.com and tell us their new userid on the client’s website. In return, some users (the lucky winners) received handsome prizes. This was probably the first of its kind ‘Cost per Acquisition’ business model on the web. And since c2w was heavily trafficked, this was a very lucrative business for us.
In March of 2001, India.com (a Company floated by mail.com) signed up a massive Boomerang deal with us. Just around that time, the dot com business was beginning to face headwinds, and we offered India.com a deal they couldn’t refuse. We proposed that
they pay us the entire campaign money in advance and enjoy a 15% upfront cash discount. The agency of India.com loved the deal and agreed. The order was signed and the Cash came in. Immediately we started the campaign.
A week later, the parent Company of India.com – mail.com got into severe investor trouble in the USA and all their subsidiaries were asked to immediately wind down. The agency called me and said ‘Sorry Alok. Immediately stop the campaign and refund us the money after deducting what you have delivered’. At our end, we had refused other deals and road-blocked our inventory for this business.
I called up my good friend Pradipto Basu who was a senior officer at Yahoo India at that time and explained the problem. His words are immortally etched in my mind. Pradipto said ‘Alok, once you fill up a car fuel tank, you can’t take the petrol out. All you do is then drive the car’. In other words, once you invite King Cash home, you don’t send him back.
I called up the agency and refused to refund the money, since our damages were also irreversible. They threatened to sue and I said ‘go ahead’. In the end, they agreed to burn the registrations (over an extended period of time), and we kept the Cash at home.
Lesson – get Cash home. Don’t hesitate to drop your margins a bit here and there as long as you get paid in advance or before time.
The Kings of Cash!
The King knows how to recover his dues.
One of my earliest lessons in managing King Cash was learnt in my father’s socks factory when I was seventeen years old. The factory used to sell all kinds of socks to about 14 dealers all over India. The turnover in the mid 80’s was around 7-8 crores per annum. While we made dress, sports and casual socks, we had a monopoly over school uniform socks. No one made so many sizes and in quantities like we did.
All through the year, the 14 dealers would be lackadaisical about payments. Some would take forever to pay; others would pay in ‘part payment’ (an amazing concept in India). As a young man with lots of Marwari testosterone, I would fume and fret, but my dad always kept smiling.
Around February, all the 14 dealers would descend to our office to place orders for School Socks for late May deliveries (Schools in India start in June and parents shop for kids uniforms by end of May). My dad and his sales team would meticulously book all orders and confirm all the shipping details, etc. In return the dealers would call back home and make forward commitments to their trader resellers and shop keepers and guarantee them their supply of school uniform socks.
On the last day of the dealer meet, our head of sales Vasudev would silently slip into the room where the dealers would be enjoying a tea session with my dad, with 14 sheets of paper and quietly hand each of the dealers their sheet. As they would read their own sheet, their eyes would roll and their hands holding the cups would tremble. The sheet contained a detailed calculation of all their unpaid dues AND a massive interest payment calculation on the delayed payments over the year. At the end of the sheet it would be clearly stipulated, ‘All moneys need to be paid in 7 days, if you want your school supplies’.
All the years that I was there, the dealers would sulk but made sure to send their moneys in before the 7 days deadline because they just could not afford to miss School Socks’ deliveries.
King Cash could be made to wait, but that would cost you deadly.
Lesson – make sure you get your moneys on time. Design defense mechanisms if simple agreements don’t work. The American middle class has collapsed due to delayed payments by them on their credit cards and has no clue as to how to pay back massively interest laden dues.
Dont mess with the King.
The King rules while the kingdom works.
One of the most fascinating lessons I learnt as an accountant was gleaned from the Hindustan Lever Limited’s (HLL) (now Unilever) balance sheet. Year after year, HLL reported a ‘negative’ working capital and made interest earnings on it!
How can Working Capital be negative?
It’s simple. HLL makes very popular consumer products like soaps, shampoos and personal hygiene products. They make these via vendors and suppliers, who are typically paid 90-120 days after their finished goods are supplied to HLL distribution points. HLL immediately puts these goods out in the market and since they are consumer goods, HLL receives cash from consumers BEFORE it needs to pay the vendors! This working Cash is then deposited in hard working bank instruments and made to earn interest! So, HLL not only makes money selling great products to us, but also by earning interest on moneys that consumer pay them before they need to pay vendors!
In the digital media, Google Ad words charges you upfront, but pays publishers later. Similarly, you need to ‘pre pay’ for a SIM Card of telecom operators, while you use the talk time over a period of time.
Lesson – get really, really smart about your cash flows – sometimes that itself can make money for you!
Essential reading – http://rodinhood.com/why-dont-companies-pay-their-suppliers-on-time
(Image courtesy – Chhavi Kejriwal’s personal playing card collection)
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Good stuff. I am always attracted to businesses that bring in cash first.
Cash is King – Very True. One thing that I’ve learnt while working for a start-up is that never bend down in front of clients and agree to whatever amount they quote. Like them, we too are running serious business. Cash needs to be paid upfront and sometimes in advance too. However, instead of giving discount, delivering complimentary add-ons goes a long way in building and maintaining relations.
since they are consumer goods, HLL receives cash from consumers BEFORE it needs to pay the vendors! – did not understand sir. Please explain
u pay for a Close Up Toothpaste tube by cash to the store – the store sends the money to HLL – so HLL receives the money from you almost immediately (except storing, logistics etc) – however the company that made the toothpaste (HLL contracts out most work) gets paid 120 days later – so you paid HLL before they paid the supplier!
A very apt article particularly in a country like India where cash collections is super tough and can make (and more often break) a company.
One clarification – your definition is of Working Cap Requirement (WCR) and the example is indeed a negative WCR. However, it is an example of positive Working Capital, as their payables always exceed receivables. ‘They always have Capital = Cash, in hand.
Working Capital = Cash deployed to run the business. It appears on the right side of the balance sheet under current assets. When you get MORE moneys than you OWE – So shop keepers paying you their collections and you need to deduct your profits and pay the vendors – then that LIABILITY will appear on the left side of the balance sheet. Historically, + is right side, – is left side – hence I define it as ‘negative’ capital
Once again great article.
Well “Cash is King” it doesn’t matter which ever business you are in.
Sometimes the future plan of your entire business may depend on it.
And i believe especially in India if your cash handling or recovering skills are not good then sooner you will be facing lots of problem.
And i liked the yahoo,hll and Google example very much.
Thanks for sharing with us such great lessons.
Thats a good read.. thanks for sharing your insights
hey Rodinhood, great article. in our current line of business, we have high AR, and we are finding it difficult to ‘design defense mechanisms’ to curb delayed payments w/o pissing off customers. probably should rack your brains sometime.
Sampath – sure – lets brainstorm
Hi,
I have a query pertaining to the HUL example. Isn’t the interest earned by HUL offset by the higher cost paid for goods which are bought on credit?
For example, your company offered a discount of 15 % on upfront payment ( first example in the article) and you still made profit. So, logically the buyer would have paid 15% more as the added cost for purchase on credit. Please explain.
The second query is – HUL gets money from investors for investing in business. Therefore, is it right on part of HUL to invest the money in govt securities etc rather than investing the same in business / buying raw materials at a cheaper rate by reducing the credit period?
Swapnil, Companies like HLL are like Wal Mart – I know of a supplier who walked into HLL to sell corrugated boxes, and when he mentioned ‘pricing’, the HLL Purchase manager presented him HIS OWN (corrugated Companies) costs. They are Gorillas and know what margins their suppliers operate on. So, discounts for HLL supplies is another league altogether.
As far as HLL investor mandate, this is extremely short term WIP – they deploy only AFTER maximizing best negotiations on purchase etc etc – so its not either / or – its AND!
Thanks for the reply sir. Just an afterthought, If HUL buys from its suppliers on credit ( without having to bear any additional cost for the credit period), the supplier in turn will be buying raw materials from someone else on credit. Going by this logic, how will the last person in the chain manage his cashflows..I mean somewhere in the chain, there will be an instance of upront payment.
lets take the case of toothpaste.
Illustrating with Cash + Credit examples:
Toothpaste is made from Chalk in this example.
Lets assume Rodinhood Company supplies Close Up to HLL
Rodinhood Co goes to Udiapur to buy Chalk.
The Chalk Mine owner sells Chalk to Rodinhood at 30 days Credit at Rs 10 for the consignment.
Rodinhood further buys Chemicals, Tube and Cardboard from 3 other vendors at Rs 10 at CASH Payment.
Rodinhood makes the Toothpaste (takes 2 months) and sells to HLL for Rs 30 (cost + profit)
Cash flows:
On day 1, Rodinhood pays 10 to the Chemical+Tube+Cardboard guy (Rodinhood either has savings or working capital from bank for this)
On day 30, Rodinhood pays 10 to the Chalk miner
On day 30 and day 60 Rodinhood pays his workers salaries ( Rs 3) and electricity and other bills (Rs 2) = Rs 5 (from Savings/Bank Overdraft)
On day 60, Rodinhood Supplies HLL the Toothpaste at Rs 30 ( so, profit = Rs 30 – (Rs 10+ Rs 10 +Rs 3 + Rs 2) = Rs 5
On day 61, the process begins all over again
SO TOTAL WCAP OF RODINHOOD deployed – Rs 25+ Rs 25 = Rs 50 employed
on Day 120 ( 60 days after supplies to HLL), Rodinhood gets paid Rs 30 from HLL
Rs 25 goes to Working Capital repayment, Rs 5 to Reserves = Self Funded Working capital
Makes sense?
It sure does now! Thanks for simplifying it to such a great extent.